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Friday, 26 September 2014

Yahoo! Now Has An Accurate Value Meter

04:30 No comments
With Alibaba (BABA) now listed on the New York Stock Exchange (NYSE), there is now price transparency on the Alibaba stake Yahoo! (YHOO) has on its balance sheet. In the past, the value of Yahoo!'s stake was only via estimates. Now there is a definite value - depending on the price of Alibaba shares in the open market.

With the 2 most valuable assets - Alibaba and Yahoo! Japan (YAHOF) - now openly trading on exchanges, the actual value of them can be tabulated and included into Yahoo!'s share price accurately. This allows for a comparison of Yahoo! between its market price and the value of its underlying assets, and a respective action can be taken by investors or by the management.

Yahoo! sold close to 140 million shares of Alibaba in its listing at $68, total proceeds is around $9.5 billion pre-tax, $6.2 billion after tax. Though there has been some arguing that Yahoo! is able to utilize the cash for a period until the tax are required to be paid during annual filings.

Yahoo! currently owns around 384 million shares of Alibaba after its listing. Based on the closing price of near $89, its stake is worth near $34.2 billion pre-tax. After tax (35%), the stake is worth close to $22.2 billion. The actual value may be higher since it was noted that the shares were likely to be held in Hong Kong which is tax-free if they were sold.

Yahoo!'s 35% (2million plus shares) stake in Yahoo! Japan is mark-to-market valued at close to $8.4 billion pre-tax, close to $5.5 billion after a 35% tax. However, I do expect the tax to be a lot lower because Yahoo! selling out Yahoo! Japan stake in the open market does not sound very likely. Instead I would expect a more of a cash-rich split off or buyout, which has a lower tax implications.

Yahoo! on its latest filings stated that it has $2.7 billion cash and cash equivalent on its balance sheet.
On a conservative estimate, valuing Yahoo!'s core business at 0 and subtracting away the $1.2 billion long-term debt, Yahoo! actual value is $35.4 billion, excluding other upsides like buyback and most importantly tax and the value of Yahoo!'s core business.

Currently valued at $38.7 billion, Yahoo! is quite fairly valued, considering that Yahoo!'s close to $16 billion unrealised tax bill from unsold securities of Alibaba and Yahoo! Japan are very unlikely to be charged fully anytime soon and are allowed to compound tax-free. In fact, I would at most expect Yahoo! to pay only half of its $16billion tax bill in any circumstances.

However, with the current value of $35.4 billion, this can serve as an indicator for investors to know when to invest in the company when it is undervalue and for Yahoo!'s management to perform buyback at price below its asset value, which help improve long-term shareholder value.

Personally, I would consider Yahoo! currently undervalued because of the tax issue where I consider 50% of the tax not going to be paid by Yahoo!, which adds close to $8 billion to the above conservative value of $35.4 billion, making it worth $43.4 billion.

I am currently long Yahoo! and will continue to load more shares when I can when the price reaches level below $40.

PS: I am merely posting my views about this company. I am also not receiving compensation from the above company or any other company. Above are just my 2 cents view of the company's valuation and are by no means any form of recommendation to purchase the stock.
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